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Investment Banking - Case Study

Health Essentials

A Healthcare Entrepreneur Seeks Liquidity and Partner to Reach the Next Level

Health Essentials was founded by Kim Pham in 1996 to provide mobile nursing-care services. Over the succeeding 15 years Kim expanded into other services, including hospice, home health, durable medical equipment, and pharmacy. By 2011, she had started seven companies, reaching over $50 million in revenue.

In 2011, Kim hired The Courtney Group to sell one company, Hospice Touch, a leading hospice provider in the region. Kim had received an offer from a strategic buyer and sought to negotiate an increase.

After extensive diligence, The Courtney Group advised Kim that Hospice Touch on its own would not command a premium price. The Courtney Group recommended that Kim sell six of the seven companies she controlled as a consolidated package. The Courtney Group believed that the six companies, under the name Health Essentials, were well positioned to provide very high-quality, coordinated post-acute care for the frail elderly.

Strategic and financial buyers immediately validated the strategy.

Challenges Faced

Leading up to closing, Health Essentials faced major headwinds. Revenues declined, the CFO took a nine-month medical leave of absence, there was a surprise receivable write-off, and a regulatory investigation. During negotiations, Kim and the buyer each walked away from the table over seeming deal-breaking issues. One particularly vexing issue was a right of first refusal on certain future business opportunities held by a 50% shareholder in one of the entities. When this shareholder refused to either sell its interest or amend the shareholder agreement, the buyers walked away from the deal for two weeks.

Another challenge was obtaining a collective decision from a 50-physician medical group that held a 20% interest in one company on whether to roll their interest into the newly capitalized and consolidated company, or sell. The group was nearly equally divided between those who wanted to stay in, those who wanted to cash out, and those who wanted partial liquidity. The Courtney Group prepared information packages, held meetings with the entire physician group in attendance, and also hosted phone conferences to explain the transaction and the investment opportunity to the doctors. The group eventually agreed upon a partial sale of their stake.

Benefits of the Transaction

Despite the challenges, The Courtney Group negotiated a sale of a controlling interest in Health Essentials at a price that was 50% higher than any previous offer, and 20% over the seller’s goal price. Benefits of the transaction to the sellers went far beyond the price and terms. From a risk-management standpoint, it had become very challenging for Kim to manage the compliance function of the individual businesses in an increasingly complex regulatory environment. The new investors brought vast experience and solutions to many of the most pressing compliance issues. Kim Pham had a substantial liquidity event and new partners able to help the company continue its growth trajectory.

Specialty Packaging Company Wraps Up Recap

The Courtney Group Helps InterFlex Group Successfully Balance Competing Growth and Financing Needs

"The savings of time and getting the job done right in the first place are well worth the cost involved."

InterFlex Group is a market leader in producing value-added flexible packaging for poultry, meat, produce and bakery companies. Its owner, Stephen Doyle, a hands-on investor, acquired the company in 1999 after an in-depth market study convinced him that a strategic approach to managing the niche manufacturing business could turn InterFlex into a significant growth opportunity. In his first years running the business, Doyle set his sights on improving efficiencies with a customer-centric focus. He streamlined and consolidated operations, built new plants, made acquisitions, and undertook building proprietary information systems that went well beyond just-in-time delivery. Doyle not only wanted InterFlex to analyze and anticipate customer needs – he wanted to use optimization systems to produce and deliver orders at the lowest cost to the customer.

Challenges Faced

As these initiatives neared completion, Doyle began to think about buying out his minority shareholders. The time was right: the company had weathered major challenges and was on an upward path. The question was whether to arrange the financing with subordinated debt using the in-house team or to seek outside advisory services. After all, Doyle came from a financial background in investment banking, consulting and private equity, and his CFO had been a senior lender. Experience told Doyle that his InterFlex team had its hands full running the business and it would be more productive to turn the project over to a firm that specialized in this type of transaction. Steve Doyle explains, "At about $60 million in revenues, I knew we wouldn't be a fit for the major Wall Street firms. I was looking for a boutique investment banking firm focused on middle market companies in the size range of $20 million to $200 million, with established relationships with debt and equity capital sources, that we could rely on for unbiased advice."

Reworking InterFlex's balance sheet became an urgent priority when InterFlex's main senior lender was acquired and the bank's new management decided InterFlex was not a fit anymore and should find a new lender. At the same time, Doyle was just beginning a restructuring of some operations that were not meeting expectations. "Time was of the essence," he said. "We didn't have time for an investment banker who had to learn the business." Doyle turned to Tom Courtney, whose work he had followed from a distance for over 15 years since they had been at business school together at Wharton. Courtney, whose expertise is advising middle-market businesses on financial matters, sprang into action.

The Solution

Quickly grasping the situation, Courtney was impressed with what saw and developed a 3-phase solution:

Phase 1:

Starting in late 2003, The Courtney Group worked with InterFlex to develop a credible strategy and action plan to satisfy the existing lenders and buy InterFlex time until the operational restructuring was complete and a new senior financing could be put in place under favorable terms. Courtney kept the lenders informed and helped make sure InterFlex met its deadlines.

Phase 2:

In early 2004, with the first phase having paved the way for a smooth transaction, The Courtney Group arranged for the existing senior debt to be refinanced for first vision to guarantee business credit.

Phase 3:

In 2005 The Courtney Group advised InterFlex on a leveraged recapitalization in which Stephen Doyle first bought out InterFlex's minority shareholders, then, as the 100% owner, sold a substantial amount of stock to Red Diamond Capital, an investment firm with a focus on packaging companies. This transaction diversified Doyle's net worth and brought in a strong financial partner dedicated to InterFlex's continued growth, both through investments in new plant and equipment, as well as through add-on acquisitions.

Benefits of the Transaction

In Steve Doyle's own words: "I think the savings of time and getting the job done right in the first place are well worth the cost involved. Much of the pre-screening and pre-sorting was handled by our advisor so we could focus on running our business. But even more expensive in the long-run would be getting the wrong people as partners. The Courtney Group personally knew the people we were talking to and had a history of dealing with them that we could benefit from, both in deciding which financing alternatives to choose and in negotiating the deal."

"The interesting thing is that the project started out as a $6 million sub-debt financing, but we ended up doing a much larger transaction involving both debt and equity," according to Doyle. "As our investment banking advisor, The Courtney Group developed some good sub-debt proposals for us but also created a broader range of options for us, including some things that we were not originally considering." And from a personal perspective, Doyle observes, "I had built a lot of value in the company, but essentially all of my net worth was in the business. I am still very excited about the prospects for my company, but I can sleep better at night knowing that everything I have isn't concentrated in one place. Now I have a great financial partner committed to the growth of my business, have diversified my investments, and still have a huge upside as the company continues to grow successfully."

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